The price of a barrel of WTI crude oil reached $88.63 early today, a level it has not reached in more than two years. The price has dropped a bit since then, trading right around $88/barrel in the early afternoon.
The rise was sparked by the latest Oil Market Report from OPEC, which raised its demand growth estimate for 2010 by 190,000 barrels/day to 1.3 million b/d. The average daily volume for 2010 is expected to be 85.78 million barrels/day.
For 2011, OPEC also raised its demand growth forecast for 2011 by 100,000 barrels/day, or an aggregate demand growth of 1.2 million barrels/day. Total volume for 2011 is expected to be 86.95 million barrels/day.
The forecast for 2010 is based on an improving outlook for GDP growth in the OECD countries and higher demand from China. OPEC believes that the new round of quantitative easing will “positively affect the [US]’s oil usage in the next six months.” The cartel projects demand growth in the US for 2010 to be 2%, or about 300,000 barrels/day compared with 2009. Auto sales were better in October, adding to OPEC’s higher demand projections.
In China, the government has been unable to slow energy consumption as the Chinese economy continues its strong GDP growth. OPEC forecasts Chinese economic growth in 2010 at 9.5% and 8.6% in 2011. The second fastest growing economy is in India, where OPEC expects to see growth of 8.5% in 2010 and 7.7% in 2011. US economic growth is forecast at 2.7% in 2010 and 2.4% in 2011, as the effects of various stimulus efforts fade away.
OPEC forecast non-OPEC supply for 2010 to be 52.16 million barrels/day. The cartel does not supply forecasts for its own production, but uses secondary sources that show that OPEC (including Iraq) produced 29.3 million barrels of oil a day in October and about 5.24 million barrels/day of natural gas liquids. The total, 34.54 million barrels/day, combined with the non-OPEC forecast, indicates that supply in 2010 will exceed demand by around 1 million barrels/day.
In a sane world, with more available supply than consumer demand, the price of crude should drop. That’s not happening, mainly because the weaker US dollar forces up the price of oil, which is traded in US dollars.
What is happening though, is that the contango curve is flattening out. Again, that is due mainly to a weak dollar, not a lack of immediate supply. As the contango curve flattens out, crude oil in floating storage is also likely to be released for sale, helping to moderate prices somewhat.
In general, OPEC’s outlook is for better global economic growth in 2010, following by slower growth in 2011. The cartel’s demand growth forecast for 2011 is well within the capability of the world’s producer to supply, with capacity to spare. If prices go up, it will not be OPEC’s fault, but the fault of market speculators. That’s been OPEC’s story for several years now, and they’re sticking to it.
Paul Ausick
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